weststar bank holding co inc - dallasfed.org...dec 31, 2018 · title: weststar bank holding co inc...

2018 Annual Report

WestStar Bank Holding Company, Inc. and Subsidiary

Annual Financial Report

December 31, 2018 and 2017

WestStar Bank Holding Company, Inc. and Subsidiary Table of Contents Page

Independent Auditor’s Report 1

Consolidated Balance Sheets 3

Consolidated Statements of Income 4

Consolidated Statements of Comprehensive Income 5

Consolidated Statements of Changes in Stockholders’ Equity 6

Consolidated Statements of Cash Flows 7

Notes to the Consolidated Financial Statements 9

Independent Auditor’s Report To the Board of Directors and Stockholders WestStar Bank Holding Company, Inc. Report on the Financial Statements We have audited the accompanying consolidated financial statements of WestStar Bank Holding Company, Inc. and Subsidiary, which comprise the consolidated balance sheets as of December 31, 2018 and 2017; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WestStar Bank Holding Company, Inc. and Subsidiary as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter We have also audited, in accordance with auditing standards generally accepted in the United States of America, WestStar Bank Holding Company, Inc. and Subsidiary’s internal control over financial reporting, as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report, dated March 7, 2019, expressed an unqualified opinion on the effectiveness of WestStar Bank Holding Company, Inc. and Subsidiary’s internal control over financial reporting.

San Antonio, Texas March 7, 2019

WestStar Bank Holding Company, Inc. and Subsidiary Consolidated Balance Sheets

December 31, 2018 and 2017 (Dollars in Thousands, Except Share Data)

Notes to the consolidated financial statements form an integral part of these statements. Page 3

2018 2017

Cash and due from banks $ 19,197 $ 18,076Interest-bearing deposits in other depository institutions 6,698 9,216

Cash and cash equivalents 25,895 27,292

Securities available for sale 453,368 372,923Securities to be held to maturity (fair value of $11,825 and

$15,460 at December 31, 2018 and 2017, respectively) 11,710 15,067Restricted investment securities 5,663 7,631Loans held for sale 214 1,811Loans – net of allowance for loan losses and deferred loan

fees of $15,240 ($12,149 in 2017) 1,238,359 1,167,061Bank premises and equipment – net 28,381 17,811Accrued interest receivable 5,716 5,617Goodwill and intangible assets – net 43,029 43,265Other real estate owned – net - 252 Prepaid expenses and other assets 9,582 8,731

$ 1,821,917 $ 1,667,461

LiabilitiesDeposits:

Noninterest-bearing $ 563,161 $ 496,488Interest-bearing 1,002,301 914,781

Total deposits 1,565,462 1,411,269

Accrued interest payable 83 56 Federal Home Loan Bank (“FHLB”) advances 5,000 18,000 Accrued expenses and other liabilities 22,288 15,524

Total liabilities 1,592,833 1,444,849

Commitments and contingencies (notes 6, 9, 10, 11, and 13)

Stockholders’ EquityCommon stock – $5 par value; 3,000,000 shares authorized;

1,931,660 shares issued and outstanding (1,924,600 sharesissued and outstanding in 2017) 9,658 9,623

Additional paid-in capital 147,249 145,638Retained earnings 83,760 71,998Accumulated other comprehensive loss (11,583) (4,647)

Total stockholders’ equity 229,084 222,612

$ 1,821,917 $ 1,667,461

Assets

Liabilities and Stockholders’ Equity

WestStar Bank Holding Company, Inc. and Subsidiary Consolidated Statements of Income

Years Ended December 31, 2018 and 2017 (Dollars in Thousands, Except Share Data)


2018 2017

Interest income:Loans – including fees $ 68,406 $ 60,206Securities available for sale 9,432 8,162Securities held to maturity 496 607Other 1,486 527

Total interest income 79,820 69,502

Interest expense:Deposits 5,597 2,732FHLB advances 584 203

Total interest expense 6,181 2,935

Net interest income 73,639 66,567

Provision for loan losses 3,044 2,662

Net interest income after provision for loan losses 70,595 63,905

Noninterest income:Service charges and fees on deposit accounts 3,493 3,578Fees from trust services 4,417 3,850Fees from insurance activities 7,210 5,978Net realized gains on sales of available for sale securities - 16Net realized gains on sales of mortgage loans held for sale 2,001 2,092Other operating income 3,429 3,286

Total noninterest income 20,550 18,800

Noninterest expense:Salaries and employee benefits 29,254 26,492Net occupancy and equipment expenses 4,679 4,263Data processing and software expenses 2,343 2,383Professional services 2,649 2,578Other operating expenses 7,831 7,605

Total noninterest expense 46,756 43,321

Net income $ 44,389 $ 39,384

Weighted-average number of shares outstanding 1,928,628 1,917,687

Basic earnings per share $ 23.02 $ 20.54

WestStar Bank Holding Company, Inc. and Subsidiary Consolidated Statements of Comprehensive Income

Years Ended December 31, 2018 and 2017 (Dollars in Thousands)


2018 2017

Net income $ 44,389 $ 39,384

Other items of comprehensive income (loss):Unrealized holding gains (losses) on securities:

Unrealized holding gains (losses) arising during the year (6,936) 1,130Less reclassification adjustment for gains included in

net income - (16)

Total other items of comprehensive income (loss) (6,936) 1,114

Comprehensive income $ 37,453 $ 40,498

WestStar Bank Holding Company, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2018 and 2017 (Dollars in Thousands, Except Share Data)


AccumulatedAdditional Other

Common Common Paid-In Retained ComprehensiveShares Stock Capital Earnings Income (Loss) Total

Balance at December 31, 2016 1,907,852 9,539$ 141,940$ 59,458$ (5,761)$ 205,176$

Net income - - - 39,384 - 39,384Change in net unrealized gains (losses) on

investment securities - - - - 1,114 1,114Contribution of stock to ESOP 1,922 10 421 - - 431Issuance of stock 700 4 154 - - 158Issuance of stock for Dividend

Reinvestment Plan ("DRIP") 14,126 70 3,123 - - 3,193Cash dividends declared - - - (26,844) - (26,844)

Balance at December 31, 2017 1,924,600 $ 9,623 $ 145,638 $ 71,998 $ (4,647) $ 222,612

Net income - - - 44,389 - 44,389Change in net unrealized gains (losses) on

investment securities - - - - (6,936) (6,936)Contribution of stock to ESOP 1,860 9 422 - - 431Issuance of stock 5,200 26 1,189 - - 1,215Cash dividends declared - - - (32,627) - (32,627)

Balance at December 31, 2018 1,931,660 $ 9,658 $ 147,249 $ 83,760 $ (11,583) $ 229,084

WestStar Bank Holding Company, Inc. and Subsidiary Consolidated Statements of Cash Flows

Years Ended December 31, 2018 and 2017 (Dollars in Thousands)


2018 2017Cash Flows From Operating ActivitiesNet income $ 44,389 $ 39,384Adjustments to reconcile net income to net

cash provided by operating activities:Stock dividend from FHLB (72) (9)Contribution of stock to ESOP 431 431Contribution of stock for director compensation 47 46 (Gain)Loss on disposition of bank premises and equipment 11 (18)(Gain)Loss on sale of other real estate owned 4 (13) (Gain) on sale of securities available for sale - (16)(Gain)Loss on loans originated for sale (2,001) (2,093)Loans originated for sale (67,918) (69,359) Proceeds from loans sold 71,516 71,589 Depreciation of bank premises and equipment 1,685 1,491Amortization of core deposit intangible 237 242 Accretion of discounts on investment securities (66) (23)Amortization of premiums on investment securities 1,757 1,747Provision for loan losses 3,044 2,662Amortization of deferred loan fees 1,494 1,369 Accretion of fair value discount 2,169 1,638 Net change in:

Accrued interest receivable (99) (869)Prepaid expenses and other assets (851) (853)Accrued interest payable 27 7Accrued expenses and other liabilities 1,119 1,005

Net cash provided by operating activities 56,923 48,358

Cash Flows From Investing ActivitiesPurchases of securities available for sale (745,953) (628,728)Proceeds from sale of securities available for sale 2,995 42,417Purchase of FHLB and FRB stock (1,586) (8,227)Proceeds from sale of FHLB and FRB stock 3,626 5,075 Principal payments of securities available for sale 48,149 46,813Principal payments of securities held to maturity 3,313 3,701Maturity of United States agency securities available for sale 600,000 500,000Maturity of municipal securities available for sale 5,780 710Purchases of bank premises and equipment (12,267) (1,527)Proceeds from sale of bank premises and equipment 1 3,283 Proceeds from sale of other real estate owned 515 314 Net change in loans (78,273) (110,945)

Net cash used in investing activities (173,700) (147,114)

WestStar Bank Holding Company, Inc. and Subsidiary Consolidated Statements of Cash Flows

Years Ended December 31, 2018 and 2017 (Dollars in Thousands) (Continued)


2018 2017Cash Flows From Financing ActivitiesNet change in deposits 154,193 111,481Net change in advances (13,000) 18,000Proceeds from issuance of common stock 1,168 3,305Dividends paid (26,981) (24,440)

Net cash provided by financing activities 115,380 108,346

Net increase (decrease) in cash and cash equivalents (1,397) 9,590

Cash and cash equivalents at beginning of year 27,292 17,702

Cash and cash equivalents at end of year $ 25,895 $ 27,292

Interest paid $ 6,154 $ 2,928

Dividends declared – not yet paid $ 12,382 $ 6,736

Loans transferred to other real estate owned – net $ 267 $ 252

Sale of other real estate owned - financed $ - $ 257

Schedules of Other Cash Flow Information and Noncash Activities

WestStar Bank Holding Company, Inc. and Subsidiary Notes to the Consolidated Financial Statements

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1. Summary of Significant Accounting Policies Consolidation The accompanying consolidated financial statements include the accounts of WestStar Bank Holding Company, Inc. (the “Holding Company”), its wholly owned subsidiary WestStar Bank (the “Bank”), and the Bank’s wholly owned subsidiaries WestStar Insurance Agency, Inc. (the “Insurance Agency”), WestStar Title, LLC. (the “Title Company”), and WestStar Tower Properties, LLC. (“WestStar Tower Properties”) (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. Nature of Operations The Bank, headquartered in El Paso, Texas, is a Texas state-chartered bank that opened for business on May 1, 1990. The Bank is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation (Bank Insurance Fund) within prescribed limits. The Bank is also a member of the Federal Home Loan Bank of Dallas. The Bank provides traditional banking, wealth management, and treasury management services. The Bank primarily services individual and corporate customers in El Paso, Texas; Las Cruces, New Mexico; and Northern Mexico. Its primary deposit products are demand, NOW, money market, savings, and time accounts. Its primary lending products are real estate and commercial loans. The Bank operates three wholly owned subsidiaries, WestStar Insurance Agency, Inc., WestStar Title, LLC., and WestStar Tower Properties, LLC. The Insurance Agency sells and services property, casualty, life and health insurance policies. The Title Company offers services that include, but are not limited to, examining title records, acting as escrow agent in the closing of commercial and residential real estate transactions and issuing owner’s and loan title insurance policies. WestStar Tower Properties holds the real estate investment for WestStar Tower, the new headquarters for the Company, currently under construction and scheduled to be in service during the fourth quarter of 2020. The Bank is subject to competition from other financial institutions. The Holding Company, Bank, Insurance Agency and Title Company are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation of goodwill, and the valuation of available-for-sale securities.


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1. Summary of Significant Accounting Policies (continued) New and Recently Issued Accounting Standards In August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update

(“ASU”) No. 2015-14, an amendment to ASU No. 2014-09, Revenue Recognition—Revenue from

Contracts with Customers (Topic 606). This ASU provides guidance on when to recognize revenue from

contracts with customers. The objective of this ASU is to eliminate diversity in practice related to this

topic and to streamline and enhance revenue recognition requirements. The ASU defines five steps to

recognize revenue including, identify the contract with a customer, identify the performance obligations

in the contract, determine a transaction price, allocate the transaction price to the performance

obligations and then recognize the revenue when or as the entity satisfies a performance obligation.

This amended update is effective for annual reporting periods beginning after December 15, 2018, and

the Company does not believe this ASU will have a material impact on its future consolidated financial

statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets

and Financial Liabilities (Topic 825-10). The ASU applies to all entities that hold financial assets or owe

financial liabilities and represents the finalization of just one component of the FASB's broader financial

instruments project. The most far-reaching ramification of the ASU is the elimination of the available-

for-sale classification for equity securities and a new requirement to carry those equity securities with

readily determinable fair values at fair value through net income. Other notable changes brought about

by the ASU involve: (a) applying a practicability exception from fair value accounting to equity securities

that do not have a readily determinable fair value, (b) assessing the need for a valuation allowance on a

deferred tax asset related to an available-for-sale debt security, (c) applying the fair value option to

liabilities and the treatment of changes in fair value attributable to instrument-specific credit risk and (d)

adding disclosures and eliminating certain disclosures. This ASU is effective for fiscal years beginning

after December 15, 2018. The Company does not believe this ASU will have a material impact on its

future consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases and subsequently issued amendments and technical corrections in ASU 2018-01, ASU 2018-10 and ASU 2018-11. The new standard, which is codified in ASC 842, Leases, sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective on January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect this standard will have on the consolidated financial statements.


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1. Summary of Significant Accounting Policies (continued) New and Recently Issued Accounting Standards (continued)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which creates a new credit impairment standard

for financial instruments. The existing incurred loss model will be replaced with a current expected

credit loss (“CECL”) model for both originated and acquired financial instruments carried at amortized

cost and off-balance sheet credit exposures, including loans, loan commitments, held-to-maturity debt

securities, financial guarantees, net investment in leases, and most receivables. Recognized amortized

cost financial assets will be presented at the net amount expected to be collected through an allowance

for credit losses. Expected credit losses on off-balance sheet credit exposures will be recognized through

a liability. Expected credit losses on available-for-sale debt securities will also be recognized through an

allowance; however, the allowance for an individual available-for-sale debt security will be limited to the

amount by which fair value is below amortized cost. Unlike current guidance, which requires certain

favorable changes in expected cash flows to be accreted into interest income, both favorable and

unfavorable changes in expected credit losses (and therefore the allowance) will be recognized through

credit loss expense as they occur. With the exception of purchased financial assets with a more than

insignificant amount of credit deterioration since origination, for which the initial allowance will be

added to the purchase price of the assets, the initial allowance on financial assets subject to the scope

(whether originated or acquired) will be recognized through credit loss expense.

Expanded disclosures will also be required. Transition will generally be on a modified retrospective basis,

with certain prospective application transition provisions for securities for which other-than-temporary

impairment had previously been recognized and for assets that had previously been accounted for in

accordance with Subtopic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated

Credit Quality. This ASU is effective for the Company in fiscal years beginning after December 15, 2021,

and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after

December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating

the effect this standard will have on the consolidated financial statements.

Significant Group Concentrations of Credit Risk Most of the Company’s activities are with customers located within El Paso County, Texas and the surrounding areas. Note 4 discusses the types of securities in which the Company invests. Note 5 discusses the types of lending in which the Company engages. Commercial real estate, including commercial construction loans, represented 69% of the total portfolio at December 31, 2018 and 2017. Acquisition Accounting Mergers and acquisitions are accounted for under the acquisition method of accounting. Purchased assets, including identifiable intangible assets, and assumed liabilities are recorded at their respective acquisition date fair values. If the consideration given exceeds the fair value of net assets received, goodwill is recognized.


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1. Summary of Significant Accounting Policies (continued) Securities The Bank classifies investment securities into one of two categories, held to maturity or available for sale. Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using a method that approximates the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Declines in the fair value of held to maturity and available for sale securities are evaluated to determine whether declines in fair value below their amortized cost are other than temporary. In estimating other-than-temporary impairment losses on debt securities, management considers a number of factors including, but not limited to: (1) the length of time and the extent to which the fair value has been less than the amortized cost; (2) the financial condition and near-term prospects of the issuer; (3) the current market conditions; and (4) the intent and ability of the Company to not sell the security or whether it is more likely than not the Company will be required to sell the security before its anticipated recovery. Restricted Investment Securities Restricted investment securities include Federal Home Loan Bank (“FHLB”) stock and Federal Reserve Bank stock, which are carried at cost on the consolidated balance sheets. These equity securities are “restricted” in that they can only be sold back to the respective institution or another member institution at par. Therefore, they are less liquid than other marketable equity securities. The Company views its investment in restricted stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value, rather than recognizing temporary declines in value. There has been no impairment to date. Loans Held for Sale Loans held for sale consist primarily of single-family residential mortgages. The loans are generally on the consolidated balance sheet for no more than 30 days. Substantially all mortgage loans originated are sold to various investors in the secondary market with servicing released. Mortgage loans held for sale are carried at fair value in accordance with the provisions of the Fair Value Options Subsections (the “Fair Value Option”) of the Accounting Standards Codification (“ASC”). Changes in the fair value of the loans held for sale are recognized in earnings and fees and costs associated with origination are recognized as incurred. The specific identification method is used to determine realized gains and losses on sales of loans, which are reported as net gains (losses) in noninterest income. Loans sold are subject to certain indemnification provisions with investors, including the repurchase of loans sold and repayment of certain sales proceeds to investors under certain conditions. In December 2018, the Company exited the business of originating mortgage loans for sale into the secondary market.


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1. Summary of Significant Accounting Policies (continued) Loans The Company grants real estate, commercial, and consumer loans to customers. A substantial portion of the loan portfolio is represented by real estate loans throughout El Paso County, Texas. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area. The Company has lending policies and procedures in place to grant loans to borrowers after underwriting standards are satisfied. Commercial and residential real estate loans are subject to underwriting standards that evaluate cash flow and fair value of the collateral. The collectability of real estate loans may be adversely affected by conditions in the real estate markets or the general economy. Management monitors and evaluates real estate loans based on collateral, geography, and risk criteria. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Such evaluations involve reviews of historical and cash flow projections and valuations of collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other available business assets and frequently include a personal guarantee by the principal owners; however, some commercial loans may be made on an unsecured basis. The repayment of commercial loans is substantially dependent on the ability of borrowers to operate their businesses profitably and collect amounts due from their customers. Consumer loans are originated after evaluation of the credit history and repayment ability of the borrower based on current personal income. The repayment of consumer loans can be adversely affected by economic conditions and other factors that impact the borrower’s income. Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees are deferred and recognized as an adjustment of the related loan yield using the interest method. A loan is considered delinquent when principal and/or interest amounts are not current, in accordance with the contractual loan agreement. The accrual of interest on real estate and commercial loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.


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1. Summary of Significant Accounting Policies (continued) Loans (continued) At the time accrual on interest is discontinued, any unpaid amounts previously accrued in the current year on these loans are reversed from income and any amounts accrued in prior years are charged against the allowance for loan losses. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, if the loan is collateral-dependent. Loans are fully charged off or partially charged down to the fair value of the collateral securing the loan when management determines the asset to be uncollectible, repayment is deemed to be delayed or doubtful beyond reasonable time frames, the borrower has declared bankruptcy, or the loan is past due for an unreasonable time period. Such charge-offs are charged against the allowance for loan losses. Recoveries of previous loan charge-offs are credited to the allowance for loan losses only when the Company receives cash or other collateral in repayment of the loan. In situations related to a borrower’s financial difficulties, the Company may grant a concession to the borrower for other than an insignificant period of time that would not otherwise be considered. In such instances, the loan will be classified as a troubled debt restructuring. These concessions may include interest rate reductions, payment forbearance, or other actions intended to minimize the economic loss and avoid foreclosure of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, the Company measures an impairment loss on the restructuring, as noted above, for impaired loans.


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1. Summary of Significant Accounting Policies (continued) Acquired Loans Loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. Acquired loans were segregated between those considered to be credit impaired and those without credit impairment at acquisition. To make this determination, management considered such factors as past due status, nonaccrual status and credit risk ratings. The fair value of acquired performing loans was determined by discounting expected cash flows, both principal and interest, at prevailing market interest rates. The difference between the fair value and principal balances due at acquisition date, the fair value discount, is accreted into income over the estimated life of each loan. Purchased credit impaired (“PCI”) loans are acquired loans with evidence of deterioration of credit quality since origination and it is probable, at the acquisition date, that the Company will not be able to collect all contractually required amounts. PCI loans acquired are accounted for on an individual loan basis. The fair value was initially based on an estimate of cash flows, both principal and interest, expected to be collected, discounted at prevailing market rates of interest. Management estimated cash flows using key assumptions such as default rates, loss severity rates assuming default, and estimated collateral values. The excess of cash flows expected to be collected from a loan over its estimated fair value at acquisition is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loan. When the timing/and or amounts of expected cash flows on such loans are not reasonably estimable, the fair value discount is not accreted into income. Allowance for Loan Losses The Company maintains an allowance for loan losses as a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the opinion of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s methodology for the allowance for loan losses includes allowance allocations calculated in accordance with the ASC, Receivables, and ASC, Contingencies. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools, and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. Factors that influence the determination include quantifiable aspects, such as loan volume, loan concentrations, and loan quality trends, including trends in nonaccrual, past-due, and classified loans; current period loan charge-offs; and recoveries. The determination also includes qualitative aspects, such as changes in local, regional, or national economies or markets, and other factors. Such qualitative factors are highly judgmental and require constant refinement. The Company has an internal loan review function, the objective of which is to identify potential problem loans, properly classify loans by risk grade, and assist senior management in maintaining an adequate allowance for loan losses by reviewing and refining the methodology, as needed, based on changing circumstances.


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1. Summary of Significant Accounting Policies (continued) Allowance for Loan Losses (continued) The Company’s allowance for loan losses consists primarily of two elements: (1) a specific valuation allowance determined in accordance with the ASC based on probable losses on specific, individual loans and (2) a general valuation allowance determined in accordance with the ASC based on historical loan loss experience for pools of similar loans, which is then adjusted to reflect the impact of current trends and conditions.

While management uses the best information available to make its evaluation, future additions to the allowance could be required based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Long Lived Assets Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from operations of the asset are less than the carrying value of the asset. The cash flows used for this analysis are those directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds its fair value. Bank Premises and Equipment Land is carried at cost. Bank premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is recognized on the straight-line method over the estimated useful lives of the asset which range from 3 to 39 years. Depreciation on leasehold improvements is recognized on the straight-line method over the shorter of the related lease term or the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. Renewals and betterments that significantly extend the useful life of an asset are capitalized. At the time an asset is sold or otherwise disposed of, the depreciated balance is written off and the resulting gain or loss is recognized. Goodwill Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. Under ASC Topic 350, goodwill of a reporting unit is not amortized but is tested for impairment on an annual basis, or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company’s goodwill impairment assessment in 2018 and 2017 concluded no impairment existed. Any future impairment will be recorded as noninterest expense in the period of assessment.


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1. Summary of Significant Accounting Policies (continued) Core Deposit Intangibles Core deposit intangibles, the portion of an acquisition purchase price which represents value assigned to the existing deposit base, have finite lives and are amortized using the accelerated method over a period of 10 years. Intangible assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Amortization of intangible assets is recorded as noninterest expense. Other Real Estate Owned – Foreclosed Assets Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at their fair value establishing a new cost basis. Subsequent to foreclosure, valuations on foreclosed property are periodically obtained by Company management. Revenue and expenses from operations and changes in the valuation allowance are included in other operating income and expenses. Bank Owned Life Insurance The Company owns life insurance policies on certain officers and directors. The Company carries the investment at the policies’ cash surrender values. The Company pays the premiums, owns the cash value, and is the primary beneficiary on the policies exclusive of the amount designated to the employee’s beneficiary. The policies had an aggregate cash surrender value totaling $7.3 million and $6.4 million as of December 31, 2018 and 2017, respectively which is included in prepaid expenses and other assets in the consolidated balance sheets. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Wealth Management Assets The Bank provides trust and investment services. The Bank recognizes income for these services on the accrual basis. Assets held by the Wealth Management Division of the Bank in fiduciary or agency capacity are not assets of the Company and are not included in the consolidated balance sheets. Total assets held by the Wealth Management Division were $545 million and $525 million as of December 31, 2018 and 2017.


Page 18

1. Summary of Significant Accounting Policies (continued) Revenue Recognition Interest income and expense is recognized on the accrual method based on the respective outstanding balances. Other revenue is recognized at the time the service is rendered or transactions occur. Income Taxes The Company, with the consent of its stockholders, has elected under the Internal Revenue Code to be taxed as an S Corporation. The stockholders of an S Corporation are taxed on their proportionate share of the entity’s taxable income. Therefore, no provision or liability for federal income taxes has been included in the consolidated financial statements. Certain specific deductions and credits flow through the Company to its stockholders. The Company accounts for uncertainty in income taxes in accordance with the provisions of ASC 740, Accounting for Uncertainty in Income Taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. The Company is subject to Texas franchise tax and New Mexico income tax. Earnings Per Share Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Off-Balance Sheet Credit-Related Financial Instruments In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, balances due from banks, and interest-bearing deposits in other depository institutions.


Page 19

1. Summary of Significant Accounting Policies (continued) Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss). Advertising Advertising costs are expensed as incurred. The amount of advertising expense incurred during the years ended December 31, 2018 and 2017 totaled $484 thousand and $607 thousand, respectively. Subsequent Events The Company has evaluated subsequent events that occurred after December 31, 2018 through March 7, 2019, the date the consolidated financial statements were available to be issued. 2. Fair Value Measurements The Company follows the provisions of the ASC, Fair Value Measurements and Disclosures. The disclosures required about fair value measurements include, among other things: (1) the amounts and reasons for certain significant transfers among the three hierarchy levels of inputs; (2) the gross, rather than net, basis for certain Level 3 rollforward information; (3) use of a “class” basis rather than a major category basis for assets and liabilities; and (4) valuation techniques and inputs used to estimate Level 2 and Level 3 fair value measurements. The ASC defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The ASC guidance establishes a fair value hierarchy for valuation inputs that prioritizes the inputs used in valuation methodologies into the following three levels:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access as of the measurement date.

Level 2 – Observable inputs other than Level 1 prices. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, yield curves, prepayment speeds, default rates, credit risks, and loss severities) and inputs that are derived from or corroborated by market data, among others.

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.


Page 20

2. Fair Value Measurements (continued) The Company uses fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure of accounting. This is done primarily for available for sale securities and loans held for sale. Fair value is used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values, such as impaired loans and other real estate owned. Fair value is also used when evaluating impairment on certain assets, including held to maturity and available for sale securities, goodwill, core deposits and other intangibles, long-lived assets, and for disclosures of certain financial instruments. There were no transfers among the three hierarchy levels of inputs. A description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Securities Available for Sale – Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include actively-traded government bonds, such as certain United States Treasury and other United States government and agency securities and exchange-traded equities and mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Level 2 securities generally include certain United States government and agency securities, corporate debt securities, and certain derivatives. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Loans Held for Sale – Mortgage loans held for sale are reported at fair value using Level 2 inputs that consist of commitments on hand from investors or prevailing market prices. These instruments are held for relatively short periods, typically no more than 30 days. As a result, changes in instrument-specific credit risk are not a significant component of the change in fair value.


Page 21

2. Fair Value Measurements (continued) The following table summarizes assets measured at fair value by class on a recurring basis as reported on the consolidated balance sheets as of December 31, 2017 and 2016, segregated by level within the fair value measurement hierarchy (dollars in thousands):

Total Fair ValueMeasurement Level 1 Level 2 Level 3

As of December 31, 2018Assets:

U.S. government agencies:Residential mortgage-backed securities 331,384 - 331,384 - Residential collateralized mortgage obligations 8,684 - 8,684 - Commercial collateralized mortgage obligations 6,130 - 6,130 -

States and political subdivisions 57,552 - 57,552 - Residentail collateralized mortgage obligations 411 - 411 - Commercial collateralized mortgage obligations 12,445 - 12,445 - Asset backed securities 6,314 - 6,314 - U.S. Corporate debt securities 29,482 - 29,482 - Mutual funds 966 966 - - Loans held for sale 214 - 214 -

$ 453,582 $ 966 $ 452,616 $ -


U.S. Treasury securities $ 1,996 $ 1,996 $ - $ - U.S. government agencies:

Residential mortgage-backed securities 289,854 - 289,854 - Residential collateralized mortgage obligations 1,395 - 1,395 - Commercial collateralized mortgage obligations 2,040 - 2,040 -

States and political subdivisions 57,904 - 57,904 - Commercial collateralized mortgage obligations 7,127 - 7,127 - U.S. Corporate debt securities 11,620 - 11,620 - Mutual funds 987 987 - - Loans held for sale 1,811 - 1,811 -

$ 374,734 $ 2,983 $ 371,751 $ -


Page 22

2. Fair Value Measurements (continued) A description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Other Real Estate Owned - Other real estate owned, upon initial recognition, is measured and reported at fair value less estimated costs of disposal though a charge-off to the allowance for loan losses based upon the fair value of the other real estate acquired, establishing a new cost basis. The fair value of other real estate owned is estimated based on appraisals with further adjustments made to the appraised values due to various factors, including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and on the collateral. Because the assumptions used to estimate the fair value of other real estate owned are not observable in the marketplace, such valuations have been classified as Level 3. Impaired Loans - The specific reserves for collateral-dependent impaired loans are determined based on the fair value of collateral method in accordance with ASC Topic 310. Under the fair value of collateral method, the specific reserve is equal to the difference between the carrying value of the loan and the fair value of the collateral less estimated selling costs. When a specific reserve is required for an impaired loan, the impaired loan is essentially measured at fair value. The fair value of collateral was determined based on appraisals, with further adjustments made to the appraised values due to various factors, including the age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. The resulting fair value measurement is disclosed in the nonrecurring hierarchy table. Where significant adjustments made to appraisals are based on assumptions not observable in the marketplace and where estimates of fair values used for other collateral supporting commercial loans are based on assumptions not observable in the marketplace, such valuations have been classified as Level 3. The following table summarizes assets for the years ended December 31, 2018 and 2017 that are measured at fair value on a nonrecurring basis (dollars in thousands):



Impaired loans 8,776 - - 8,776Purchased credit impaired loans 2,141 - - 2,141

$ 10,917 $ - $ - $ 10,917


Page 23

2. Fair Value Measurements (continued)


As of December 31, 2017

Assets:Other real estate owned $ 252 $ - $ - $ 252

Impaired loans 9,628 - - 9,628Purchased credit impaired loans 3,309 - - 3,309

$ 13,189 $ - $ - $ 13,189

3. Cash and Due From Banks and Interest-Bearing Deposits in Other Depository Institutions Cash and due from banks consist primarily of funds held on deposit in a noninterest-bearing transaction account at a correspondent bank. All of a depositor’s accounts at an insured depository institution are insured by the FDIC up to the standard maximum deposit insurance amount of $250,000. At times, the Company may also maintain cash in an account with a custodian bank. The account maintained at the custodian bank is not insured by the FDIC. Interest-bearing deposits in other depository institutions consist of interest-bearing demand deposit accounts with the Federal Home Loan Bank of Dallas and the Federal Reserve Bank. The Company is required to maintain average balances on hand or with the Federal Reserve Bank. The required reserve balances amounted to $3.0 million and $2.4 million at December 31, 2018 and 2017, respectively. 4. Investment Securities Investment securities are principally investments in United States government agency mortgage-backed securities, U.S. government agency and non-agency collateralized mortgage obligations, securities issued by states and political subdivisions, asset-backed securities and U.S. corporate debt securities. A portion of the Company’s securities issued by states and political subdivisions are tax-exempt. Tax-exempt interest income earned was $1.5 million and $1.6 million for the years ended December 31, 2018 and 2017, respectively.


Page 24

4. Investment Securities (continued) The amortized cost and fair value of securities, with gross unrealized gains and losses, were as follows (dollars in thousands):

Gross Gross ApproximateAmortized Unrealized Unrealized Fair

Cost Gains Losses Value

Securities Available for Sale at December 31, 2018

U.S. government agencies:Residential mortgage-backed securities 340,662 193 (9,471) 331,384Residential collateralized mortgage obligations 8,748 8 (72) 8,684Commercial collateralized mortgage obligations 6,188 16 (74) 6,130

States and political subdivisions 58,733 154 (1,335) 57,552Residential collateralized mortgage obligations 411 - - 411Commercial collateralized mortgage obligations 12,701 - (256) 12,445Asset-backed securities 6,321 4 (11) 6,314U.S. Corporate debt securities 30,186 80 (784) 29,482`

Total debt securities 463,950 455 (12,003) 452,402

Mutual funds 1,000 - (34) 966

Total securities available for sale $ 464,950 $ 455 $ (12,037) $ 453,368

Securities Available for Sale at December 31, 2017

U.S. Treasury securities $ 1,996 $ - $ - $ 1,996U.S. government agencies:

Residential mortgage-backed securities 294,558 227 (4,931) 289,854Residential collateralized mortgage obligations 1,395 - - 1,395Commercial collateralized mortgage obligations 2,040 - - 2,040

States and political subdivisions 57,834 637 (567) 57,904Commercial collateralized mortgage obligations 7,127 - - 7,127U.S. Corporate debt securities 11,620 - - 11,620

Total debt securities 376,570 864 (5,498) 371,936

Mutual funds 1,000 - (13) 987

Total securities available for sale $ 377,570 $ 864 $ (5,511) $ 372,923

Securities to Be Held to Maturityat December 31, 2018

U.S. government agency residentialmortgage-backed securities $ 11,710 $ 153 $ (38) $ 11,825

Securities to Be Held to Maturityat December 31, 2017

U.S. government agency residentialmortgage-backed securities $ 15,067 $ 393 $ - $ 15,460


Page 25

4. Investment Securities (continued) At December 31, 2018 and 2017, the Company had investment securities carried at approximately $89.2 million and $107.4 million, respectively, pledged to secure public funds and for other purposes required or permitted by law. The amortized cost and fair value of available for sale debt securities and held to maturity debt securities by contractual maturity at December 31, 2018 are shown below (dollars in thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized Fair

Cost Value

Securities available for sale:Due in one year or less $ 601 $ 598 Due after one year through five years 22,092 22,021Due after five years through ten years 43,951 43,268Due after ten years 28,596 27,461

95,240 93,348

U.S. government agencies:Residential mortgage-backed securities 340,662 331,384Residential collateralized mortgage obligations 8,748 8,684Commercial collateralized mortgage obligations 6,188 6,130

Residential collateralized mortgage obligations 411 411Commercial collateralized mortgage obligations 12,701 12,445

$ 463,950 $ 452,402

Securities to be held to maturity:U.S. government agency residential

mortgage-backed securities $ 11,710 $ 11,825

For the year ended December 31, 2018 and 2017, proceeds from the sale of available for sale securities amounted to $3.0 million and $42.4 million, respectively. Gross realized losses amounted to $200 for the year ended December 31, 2018. Gross realized gains amounted to $106 thousand and gross realized losses amounted to $90 thousand for the year ended December 31, 2017. There were no sales of securities classified as held to maturity during the years ended December 31, 2018 and 2017.


Page 26

4. Investment Securities (continued) Information pertaining to securities with gross unrealized losses at December 31, 2018 and 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (dollars in thousands):

Number Gross Number Gross

of Fair Unrealized of Fair Unrealized

Securities Value Losses Securities Value Losses

Securities Available for Sale

U.S. government agency:

Residential mortgage-backed securities

Unrealized losses for less than 12 months 17 $ 66,909 $ (232) 20 $ 145,235 $ (1,585)

Unrealized losses for twelve months or more 43 227,730 (9,239) 19 118,399 (3,346)

60 294,639 (9,471) 39 263,634 (4,931)

Collateralized mortgage obligations

Unrealized losses for less than 12 months 7 7,075 (105) - - -

Unrealized losses for twelve months or more 1 1,990 (41) - - -

8 9,065 (146) - - -

States and political subdivisions

Unrealized losses for less than 12 months 18 8,913 (138) 8 6,861 (71)

Unrealized losses for twelve months or more 30 15,428 (1,197) 20 8,996 (496)

48 24,341 (1,335) 28 15,857 (567)

Collateralized mortgage obligations



11 9,872 (256) - - -

Asset-backed securities


Unrealized losses for twelve months or more - - - - - -

5 4,345 (11) - - -

U.S. Corporate debt securities



24 20,416 (784) - - -

Mutual funds

Unrealized losses for less than 12 months - - - 1 987 (13)

Unrealized losses for twelve months or more 1 966 (34) - - -

1 966 (34) 1 987 (13)

Total securities available for sale

Unrealized losses for less than 12 months 63 100,780 (756) 29 153,083 (1,669)

Unrealized losses for twelve months or more 94 262,864 (11,281) 39 127,395 (3,842)

157 $ 363,644 $ (12,037) 68 $ 280,478 $ (5,511)

December 31, 2018 December 31, 2017


Page 27

4. Investment Securities (continued)

Number Gross Number Gross

of Fair Unrealized of Fair Unrealized

Securities Value Losses Securities Value Losses

Securities to be Held to Maturity

U.S. government agency:

Residential mortgage-backed securities

Unrealized losses for less than 12 months 15 $ 3,672 $ (26) - $ - $ -

Unrealized losses for twelve months or more 3 724 (12) - - -

18 $ 4,396 $ (38) - $ - $ -

December 31, 2018 December 31, 2017

Management evaluates securities for other-than-temporary impairment at least on an annual basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than the amortized cost; (2) the financial condition and near-term prospects of the issuer; (3) the current market conditions; and (4) the intent and ability of the Company to not sell the security or whether it is more likely than not the Company will be required to sell the security before its anticipated recovery. Declines in the fair value of held to maturity and available for sale securities below their amortized cost basis that are deemed to be other than temporary are carried at fair value. Any portion of a decline in value associated with credit loss is recognized in earnings as realized losses. Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time we expect to receive full value for the securities. Furthermore, as of December 31, 2018, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. Any unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if the market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2018 and 2017, management believes the impairment detailed in the tables above are temporary and no impairment loss has been realized in our consolidated income statement.


Page 28

5. Loans and Allowance for Loan Losses The components of loans in the consolidated balance sheets were as follows (dollars in thousands):

2018 2017

Real estate:Construction, land development,

and other land loans $ 202,936 $ 213,195Farmland 32,416 37,2101-4 family residential properties 53,923 60,788Multifamily residential properties 110,612 111,382Nonfarm nonresidential properties 474,773 404,339

Commercial and industrial loans 376,552 349,272Consumer nonreal estate and other loans:

Automobile loans 259 499Other loans 2,128 2,525

1,253,599 1,179,210Net deferred loan fees (2,444) (1,955)Allowance for loan losses (12,796) (10,194)

$ 1,238,359 $ 1,167,061

December 31,

Included in other loans are deposit overdrafts that have been reclassified as loans of approximately $41 thousand and $277 thousand as of December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, foreign loans totaled approximately $65.5 million and $59.7 million, respectively. As part of the Bank’s on-going monitoring of the credit quality of the loan portfolio, management assigns risk grades to the real estate and commercial loans. The loans are graded on a scale of 1 to 10. A description of the 10 risk grades is as follows:

Grades 1 and 2 – These grades include loans that are of the highest quality and with minimal risk. The borrower should have ready access to the capital markets or financing. Credit exceptions should be minor or nonexistent. Financial ratios should be strong and clearly above peers. All credit information should be complete with updates readily obtainable. The Bank’s relationship with management should be strong and well maintained. Management should have both depth and experience. The business should be well established with superior history and be in a stable industry. There should be no noncompliance issues with regard to the loan agreement. Regardless of the borrower’s reputed strength, if the Bank lacks adequate, timely financial information or a strong relationship with management, the borrower rating will not fit in these first two categories.


Page 29

5. Loans and Allowance for Loan Losses (continued)

Grades 3, 4, 5, and 6 – These grades include loans with acceptable risk. Although the borrower’s strengths will vary, the Bank should be comfortable with the financial and management capabilities of such borrowers. Exceptions should be controllable and mitigated by other strengths. The borrower’s recent history should be acceptable. A Grade 6 loan may need to be watched more closely than better grades, but it is not a workout loan.

Grade 7 – This grade includes loans with unacceptable risk characteristics. Loans in this category are currently protected as to collectibility; however, the loans have a potential weakness which may, if not checked or corrected, cause the Bank’s credit exposure to increase in the future. Loans in this category carry an undue and unwarranted credit risk, but not to a degree that justifies a more adverse risk rating.

Grade 8 – This grade includes loans with unacceptable risk characteristics. This grade equates to the regulators’ substandard category. This risk grade includes loans that may not be fully collectible because of problems with the borrower’s net worth and paying capacity or with the value of the collateral. Loans may be adequately supported by collateral, but may have well-defined weaknesses. Loans that contain weaknesses, if not corrected, could result in a loss to the Bank. The borrower may be in bankruptcy and access to funds or collateral is dependent on judicial action. Loans in this category may need a specific allocation of the allowance for loan and lease losses, but it is less than 50%. Loans in this category may need to be on nonaccrual.

Grade 9 – This grade includes loans with unacceptable risk characteristics. This grade equates to the regulators’ doubtful category. Loans in this risk grade category have weaknesses of Grade 8 loans; however, the severity of these weaknesses makes full collection highly improbable based on current conditions. Loans in this category have an extremely high probability of loss. However, certain important outstanding issues do not allow the Bank to accurately determine the amount of the loss.

Grade 10 – This grade equates to the regulators’ classification of loss. Loans in this risk grade category are uncollectible or of such little value that continuing to consider them as assets is not warranted. Loans may become totally collateral-dependent for repayment, but the Bank’s ability to obtain control of its collateral cannot be assured within a reasonable period of time. Loans in this category could have repayment potential; however, repayment cannot be measured, or is too far in the future that it can no longer be justified as an asset of the Bank. Losses are taken as soon as the loss is clearly identified.


Page 30

5. Loans and Allowance for Loan Losses (continued) At December 31, 2018 and 2017, the Company’s real estate and commercial loan portfolio risk grades by loan segment were as follows (dollars in thousands):

Pass Substandard Doubtful Loss(Grades 1-7) (Grade 8) (Grade 9) (Grade 10) Total

December 31, 2018


and other land loans $ 199,565 $ 3,371 $ - $ - $ 202,936Farmland 28,919 3,497 - - 32,4161-4 family residential properties 53,288 635 - - 53,923Multifamily residential properties 109,360 1,252 - - 110,612Nonfarm nonresidential properties 469,026 5,747 - - 474,773

Commercial and industrial loans 369,859 6,693 - - 376,552

$ 1,230,017 $ 21,195 $ - $ - $ 1,251,212

December 31, 2017


and other land loans $ 208,547 $ 4,648 $ - $ - $ 213,195Farmland 33,002 4,208 - - 37,2101-4 family residential properties 58,523 2,265 - - 60,788Multifamily residential properties 100,961 10,421 - - 111,382Nonfarm nonresidential properties 397,328 7,011 - - 404,339

Commercial and industrial loans 344,949 4,157 166 - 349,272

$ 1,143,310 $ 32,710 $ 166 $ - $ 1,176,186


Page 31

5. Loans and Allowance for Loan Losses (continued) The Company grades its consumer loans as either performing or nonperforming (defined by the Company as greater than 30 days past due). At December 31, 2018 and 2017, the Company’s consumer loans were graded as follows (dollars in thousands):

Performing Nonperforming Total

December 31, 2018

Consumer nonreal estate and other loans:

Automobile loans $ 258 $ 1 $ 259Other loans 2,121 7 2,128

$ 2,379 $ 8 $ 2,387

December 31, 2017

Consumer nonreal estate and other loans:

Automobile loans $ 497 $ 2 $ 499Other loans 2,512 13 2,525

$ 3,009 $ 15 $ 3,024


Page 32

5. Loans and Allowance for Loan Losses (continued) An aged analysis of past-due loans, segregated by class of loans, as of December 31, 2018 and 2017 were as follows (dollars in thousands):

AccruingLoans Loans 90 Days

Current 30-89 Days or More Nonaccrual TotalLoans Past Due Past Due Loans Loans

December 31, 2018


and other land loans $ 200,954 $ 144 $ - $ 1,838 $ 202,936Farmland 32,100 - - 316 32,4161-4 family residential properties 53,889 34 - - 53,923Multifamily residential properties 110,612 - - - 110,612Nonfarm nonresidential properties 473,827 226 - 720 474,773

Commercial and industrial loans 373,853 2,350 - 349 376,552Consumer nonreal estate and

other loans:Automobile loans 258 - 1 - 259Other loans 2,121 7 - - 2,128

$ 1,247,614 $ 2,761 $ 1 $ 3,223 $ 1,253,599

December 31, 2017


and other land loans $ 210,988 $ 518 $ 1,689 $ - $ 213,195Farmland 36,856 354 - - 37,2101-4 family residential properties 59,730 484 - 574 60,788Multifamily residential properties 111,382 - - - 111,382Nonfarm nonresidential properties 402,208 539 720 872 404,339

Commercial and industrial loans 346,759 1,168 48 1,297 349,272Consumer nonreal estate and

other loans:Automobile loans 497 2 - - 499Other loans 2,512 13 - - 2,525

$ 1,170,932 $ 3,078 $ 2,457 $ 2,743 $ 1,179,210


Page 33

5. Loans and Allowance for Loan Losses (continued) Loans are considered impaired and placed on nonaccrual status when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Loans may be placed on impaired and nonaccrual status regardless of whether or not such loans are considered past due. Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect the repayment of loans. An analysis of impaired and nonaccrual loans, segregated by class of loans, as of December 31, 2018 and 2017 were as follows (dollars in thousands):

Recorded TotalRecorded Recorded Investment Recorded

Investment Investment for Purchased Investment Average InterestWith No With Credit and Unpaid Related Recorded Income

Allowance Allowance Impaired Balance Allowance Investment Recognized

December 31, 2018


and other land loans $ 1,838 $ - $ - $ 1,838 $ - $ 919 $ 38 Farmland 3,108 316 - 3,424 19 3,782 233 1-4 family residential properties - 157 - 157 39 521 10 Multifamily residential properties - 571 - 571 23 734 60 Nonfarm nonresidential properties 1,060 1,709 - 2,769 532 3,414 110

Commercial and industrial loans 165 646 2,141 2,952 181 3,304 362

$ 6,171 $ 3,399 $ 2,141 $ 11,711 $ 794 $ 12,674 $ 813

December 31, 2017


and other land loans $ - $ - $ - $ - $ - $ 1,688 $ - Farmland 4,140 - - 4,140 - 2,070 330 1-4 family residential properties 729 155 - 884 37 1,171 28 Multifamily residential properties - 896 - 896 40 750 66 Nonfarm nonresidential properties 1,592 1,439 1,027 4,058 124 5,262 212

Commercial and industrial loans 302 1,071 2,282 3,655 495 4,416 303

$ 6,763 $ 3,561 $ 3,309 $ 13,633 $ 696 $ 15,357 $ 939


Page 34

5. Loans and Allowance for Loan Losses (continued) Impaired loans also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. Key information related to troubled debt restructurings as of December 31, 2018 and 2017 were as follows (dollars in thousands):

Premodification PostmodificationOutstanding Outstanding

Number Recorded Recorded of Loans Investment Investment

December 31, 2018

Real estate:Farmland 1 2,513 2,5131-4 family residential properties 4 357 357 Nonfarm nonresidential properties 4 1,486 1,486

Commercial and industrial loans 9 668 668

18 $ 5,024 $ 5,024

December 31, 2017

Real estate:Construction, land development

and other land loans 1 $ 250 $ 250Farmland 1 2,795 2,7951-4 family residential properties 5 442 442 Nonfarm nonresidential properties 8 3,241 3,241

Commercial and industrial loans 12 1,908 1,372

27 $ 8,636 $ 8,100


Page 35

5. Loans and Allowance for Loan Losses (continued) Troubled debt restructurings that have defaulted in the current period within 12 months of their modification date as of December 31, 2018 and 2017 are shown in the table below. The Company reports these defaulted troubled debt restructurings based on payment default of 30 days past due (dollars in thousands).

2018 2017

Troubled debt restructurings that subsequently defaulted:Farmland $ 2,513 $ - Nonfarm nonresidential properties - 494 Commercial and industrial loans 201 522

December 31,

Recorded Investment

Changes in the allowance for loan losses, by portfolio segment, for the years ended December 31, 2018 and 2017 were as follows (dollars in thousands):

Loans Secured CommercialYear Ended December 31, 2018 by Real Estate and Industrial Consumer Total

Balance at beginning of year $ 6,449 $ 3,697 $ 48 $ 10,194

Provision for loan losses 1,804 1,252 (12) 3,044

Charge-offs (40) (450) (43) (533)Recoveries 10 58 23 91

Net (charge-offs)recoveries (30) (392) (20) (442)

Balance at end of year $ 8,223 $ 4,557 $ 16 $ 12,796

Allocation:Individually evaluated for

impairment $ 613 $ 181 $ - $ 794Collectively evaluated for

impairment 7,610 4,376 16 12,002Purchased credit impaired loans - - - -


Page 36

5. Loans and Allowance for Loan Losses (continued)

Loans Secured CommercialLoans Secured Commercial

Year Ended December 31, 2017 by Real Estate and Industrial Consumer Total

Balance at beginning of year $ 5,697 $ 2,382 $ 22 $ 8,101

Provision for loan losses 722 1,886 54 2,662

Charge-offs (23) (646) (37) (706)Recoveries 53 75 9 137

Net (charge-offs)recoveries 30 (571) (28) (569)

Balance at end of year $ 6,449 $ 3,697 $ 48 $ 10,194

Allocation:Individually evaluated for

impairment $ 201 $ 495 $ - $ 696Collectively evaluated for

impairment 6,248 3,202 48 9,498Purchased credit impaired loans - - - -

During the year ended December 31, 2018, the Company did not implement any significant changes to its allowance for loan loss methodology. The Company’s recorded investment in loans as of December 31, 2018 and 2017 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology were as follows (dollars in thousands):

Loans Secured CommercialYear Ended December 31, 2018 by Real Estate and Industrial Consumer Total

Loans individually evaluated for impairment $ 8,759 $ 811 $ - $ 9,570Loans collectively evaluated for impairment 865,901 373,600 2,387 1,241,888

Purchase credit impaired loans - 2,141 - 2,141

Balance at end of year $ 874,660 $ 376,552 $ 2,387 $ 1,253,599

Year Ended December 31, 2017

Loans individually evaluated for impairment $ 8,951 $ 1,373 $ - $ 10,324Loans collectively evaluated for impairment 816,936 345,617 3,024 1,165,577

Purchase credit impaired loans 1,027 2,282 - 3,309

Balance at end of year $ 826,914 $ 349,272 $ 3,024 $ 1,179,210


Page 37

6. Bank Premises and Equipment Components of Bank premises and equipment included in the consolidated balance sheets were as follows (dollars in thousands):

2018 2017

Land $ 5,150 $ 5,140Buildings and improvements 23,815 13,103Furniture and equipment 5,783 5,094Computer software 350 370Leasehold improvements 1,958 1,810

37,056 25,517Less accumulated depreciation and amortization (8,675) (7,706)

$ 28,381 $ 17,811

December 31,

During 2018, the Company formed WestStar Tower Properties, LLC. to hold the real estate investment for WestStar Tower, the new headquarters for the Company. WestStar Tower is currently under construction in downtown El Paso and it is anticipated the Company will move into the Tower during the fourth quarter of 2020. WestStar Tower will be a 19-story Class A, LEED-certified office building with a structured parking garage. Upon completion of the Tower, the Company will occupy three floors of office space and house its main branch on the ground level. It is anticipated the Company’s total investment in this property will be approximately $58 million of which $10.6 million has already been paid in the form of a deposit. As a result of the new headquarters being built, the Company entered into an agreement to sell its current headquarters at 500 N. Mesa for $4 million. The sale is currently in the due diligence phase with an anticipated close date of August 2019. In 2018, the Company also entered into a contract to purchase approximately 1 acre of land in far East El Paso for $600 thousand in order to relocate its Ysleta branch. It is anticipated the purchase will close during the second quarter of 2019 and construction of the new branch will commence at that time. The Company plans to open the new branch location during the first quarter of 2020. The Company closed its El Dorado branch in April 2017 and sold the branch premises for a loss of approximately $162 thousand during the year. In December 2017, the Resler branch premises was sold for a gain of approximately $180 thousand. Depreciation expense for the years ended December 31, 2018 and 2017 amounted to $1.7 million and $1.5 million, respectively. The Company leases various property in the El Paso, Texas and Las Cruces, New Mexico area. The leased properties are used by the Company to operate branches, office space and to house the Insurance Agency and Title Company. The lease terms range from three years to twenty years with options to renew.


Page 38

6. Bank Premises and Equipment (continued) Rent expense on these leases totaled $504 thousand and $458 thousand for the years ended December 31, 2018 and 2017, respectively. The future minimum rental commitments under these leases are as follows (dollars in thousands): Year ending December 31,

2019 $ 5282020 5372021 2932022 2382023 205Thereafter 379

$ 2,180

In the past, the Company subleased portions of its premises to various tenants under rental agreements. The Company paid certain taxes and operating expenses on the premises and provided for general maintenance. Rental income, including income received under month-to-month rent contracts, totaled $3 thousand for the year ended December 31, 2018 ($137 thousand in 2017). The rental income is netted against net occupancy and equipment expenses in the accompanying consolidated statements of income. 7. Goodwill and Intangible Assets As of December 31, 2018 and 2017, the carrying amount of goodwill was $41.5 million which was recorded in connection with the First Fabens Bancorporation, Inc. merger (“FFB Merger”). The Company recognized $2.1 million of core deposit intangible in 2016 due to the FFB Merger. The core deposit intangible is being amortized using the accelerated method over a period of 10 years. The amount of the core deposit intangible, net of accumulated amortization, was $1.5 million and $1.8 million as of December 31, 2018 and 2017, respectively. Amortization expense during 2018 and 2017 were $237 thousand and $241 thousand, respectively. Estimated future amortization expense is as follows (dollars in thousands): Year ending December 31,

2019 $ 2312020 2252021 2172022 2082023 199Thereafter 462

$ 1,542


Page 39

8. Deposits The aggregate amount of certificates of deposit (“CDs”) in denominations exceeding $250 thousand, were approximately $120.6 million and $129.8 million at December 31, 2018 and 2017, respectively. At December 31, 2018, the scheduled maturities of CDs are as follows (dollars in thousands): Year ending December 31,

2019 $ 190,9732020 14,0362021 1,2312022 1,5292023 1,347

$ 209,116

9. Federal Home Loan Bank Borrowings The Bank has the ability to borrow both short-term and long-term funds from the FHLB. The borrowings are collateralized by a blanket lien on certain real estate and commercial loans, all FHLB capital stock, and certain investment securities owned by the Bank. The borrowings are subject to restrictions or penalties in the event of prepayment. With the purchase of additional FHLB capital stock, the Company could borrow up to $625 million from FHLB as of December 31, 2018 ($496 million in 2017). Short-term borrowings totaled $5 million and $18 million at December 31, 2018 and 2017, respectively. Weighted-average interest rates for short-term borrowings were 2.70% and 1.50% at December 31, 2018 and 2017, respectively. In conjunction with the above advances, the Bank is required to maintain FHLB capital stock. The number of shares required is a percentage of Bank assets and outstanding advances. Required stock at December 31, 2018 and 2017 totaled $0.9 million and $1.3 million, respectively. 10. Other Borrowings The Bank entered into a $20 million federal funds line of credit with Frost Bank. No funds have been drawn against this line of credit as of December 31, 2018 and 2017. The line of credit is available for one year and is renewable each year. The Bank may borrow funds from the Federal Reserve Bank. The maximum credit available is equal to the amount of unpledged securities held in safekeeping at the Federal Reserve Bank. The total amount of unpledged securities in safekeeping totaled $18 million as of December 31, 2018 ($11 million in 2017). No funds were borrowed from the Federal Reserve Bank as of December 31, 2018 and 2017. There is no stated expiration date on this borrowing agreement as long as there are investments held in safekeeping with the Federal Reserve Bank.


Page 40

11. Off-Balance Sheet Activities Credit-Related Financial Instruments The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby and performance letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. The following financial instruments, whose contract amounts represent credit risk, were outstanding (dollars in thousands):

2018 2017

Unfunded commitments under lines of credit $ 431,937 $ 359,963Standby and performance letters of credit 41,355 26,999

December 31,

Contract Amount

Unfunded commitments under lines of credit include revolving credit lines, straight credit lines, and interim construction loans, which are commitments for possible future extensions of credit to existing customers. These lines of credit may not be drawn upon to the total extent to which the Company is committed. To reduce credit risk related to the use of credit-related financial instruments, the Company might deem it necessary to obtain collateral. The amount and nature of the collateral obtained are based on the Company’s credit evaluation of the customer. Collateral held varies, but may include cash; securities; accounts receivable; inventory; property, plant, and equipment; and real estate. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company may hold collateral supporting those commitments if deemed necessary.


Page 41

12. Federal Income Taxes Taxable income is reported on the federal tax returns of the Company’s stockholders. Accordingly, no provision has been made for federal income tax in the accompanying consolidated financial statements. The Company files a United States federal income tax return, as well as a state return in Texas and New Mexico. With few exceptions, the Company is no longer subject to federal and state examinations by tax authorities for years before 2015.

13. Legal Contingencies The Company may, from time to time, be involved in litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigations and claims will not be material to the Company’s financial position. 14. Related Party Transactions In the ordinary course of business, the Bank has granted loans to principal officers and directors and their affiliates. Loans outstanding to principal officers and directors and their affiliates totaled $41.2 million and $33.8 million at December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, unfunded commitments under lines of credit and standby letters of credit with related parties totaled approximately $9.8 million and $24.8 million, respectively. Deposits from related parties held by the Bank at December 31, 2018 and 2017, totaled $198.1 million and $140.6 million, respectively.

15. Employee Benefits The WestStar Bank 401(k) Plan and Trust (the “Plan”) is a 401(k) plan which covers employees who have attained the age of 21 and have met certain eligibility requirements as to length of service. Participants in the Plan make voluntary contributions up to the annual maximum amount allowable under applicable sections of the Internal Revenue Code. The Company may elect to make discretionary contributions to the Plan on an annual basis. For the year ended December 31, 2018, the Company contributed $431 thousand ($430 in 2017) to the Plan. Effective January 1, 2003, the Company elected to make discretionary contributions to the WestStar Bank Holding Company, Inc. Employee Stock Ownership Plan (“ESOP”) and ceased contributions to the Plan. The ESOP was adopted on January 24, 2003. The purpose of the ESOP is to enable employees who are at least 21 years of age and have completed 1 year of service to become participants of the ESOP. Contributions to the ESOP are determined by the Company. For the years ended December 31, 2018 and 2017, the Company contributed 1,860 and 1,922 shares of its common stock, respectively. The common stock had a total fair value of $431 thousand for the years ended December 31, 2018 and 2017. These contributions are included in salaries and employee benefits in the accompanying consolidated statements of income. Dividends paid on ESOP shares are allocated to participants based on their account balance.


Page 42

15. Employee Benefits (continued) In the event a terminated ESOP participant desires to sell his or her shares of the Company’s stock, the Company may be required to purchase the shares from the participant at their fair market value. At December 31, 2018 and 2017, the ESOP held 65,110 and 63,250 shares, respectively, all of which have been allocated to ESOP participants. There were no shares purchased by the Company through the ESOP’s put option during the years ended December 31, 2018 and 2017. In 2009, the Company adopted a deferred compensation plan that covers certain executive employees. Contributions for the years ended December 31, 2018 and 2017 totaled $482 thousand and $534 thousand, respectively. 16. Stockholders’ Equity During 2017, the Company implemented a Dividend Reinvestment Plan (“DRIP”). The purpose of the DRIP is to provide the participating shareholders of the Company with a convenient method of reinvesting cash dividends and voluntary cash contributions in additional shares of the Company’s common stock. Any holder of record of shares of Company common stock is eligible to participate in the DRIP. For the year ended December 31, 2017, the Company issued 14,126 shares of common stock with a value of $3.2 million under the DRIP. The ESOP may reinvest cash dividends in additional shares of common stock. During 2017, the ESOP reinvested $110 thousand in the DRIP and acquired 486 shares of common stock at $226.00 per share. The Company did not issue any shares of common stock under the DRIP during 2018. 17. Minimum Regulatory Capital Requirements The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about component classification, risk weighting, and other factors. The Basel III capital rules became effective for the Bank on January 1, 2015, subject to a four-year phase-in period. Quantitative measures established by the Basel III capital rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the following table) of Common Equity Tier 1 Capital, Tier 1 Capital, and Total Capital to Risk-Weighted Assets, and of Tier 1 Capital to Average Assets. In connection with the adoption of the Basel III capital rules, the Bank elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1 Capital. On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”) was passed which among other things updated the Small Bank Holding Company Policy Statement. The final rule implementing changes to the Policy Statement went into effect on August 30, 2018. Under the revised Policy Statement, the threshold for bank holding companies that are exempt


Page 43

17. Minimum Regulatory Capital Requirements (continued) from minimum capital requirements set forth in the Federal Reserve’s capital adequacy guidelines was raised from $1 billion in total consolidated assets to $3 billion in total consolidated assets. As a result, WestStar Bank Holding Company, Inc. was not subject to the minimum capital requirements as of December 31, 2018. Management believes, as of December 31, 2018 and 2017, that the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2018, the most recent notification from the primary regulatory agency of the Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. The following tables present actual and required capital ratios as of December 31, 2018 for the Bank and 2017 for the Company and Bank under the Basel III capital rules. The minimum required capital amounts present the minimum required levels as of December 31, 2018 and 2017 based on the phase-in of the Basel III capital rules and the minimum required as of January 1, 2019 when the phase-in is complete. Capital levels to be considered well capitalized under prompt corrective action regulations are also presented.

(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio

December 31, 2018Common Equity Tier 1 Capital

to Risk-Weighted Assets:WestStar Bank $197,394 12.7% $99,069 6.4% $108,782 7.0% $101,012 6.5%

Tier 1 Capital to Risk-Weighted Assets:

WestStar Bank $197,394 12.7% $122,379 7.9% $132,092 8.5% $124,322 8.0%

Total Capital to Risk-Weighted Assets:

WestStar Bank $210,190 13.5% $153,460 9.9% $163,173 10.5% $155,403 10.0%

Tier 1 Capital to AverageAssets:

WestStar Bank $197,394 11.0% $71,773 4.0% $71,773 4.0% $89,717 5.0%

Actual Phase-In Phase-In Action Provisions

Basel III Basel III Capitalized UnderCurrent Full Prompt Corrective

MinimumMinimum Minimum RequiredRequired Required to be Well


Page 44

17. Minimum Regulatory Capital Requirements (continued)

(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio

December 31, 2017

Common Equity Tier 1 Capital

to Risk-Weighted Assets:

Consolidated $184,583 13.4% $79,029 5.8% $96,209 7.0% N/A N/A

WestStar Bank $184,373 13.4% $79,029 5.8% $96,209 7.0% $89,337 6.5%

Tier 1 Capital to Risk-

Weighted Assets:


WestStar Bank $184,373 13.4% $99,645 7.3% $116,825 8.5% $109,953 8.0%

Total Capital to Risk-

Weighted Assets:


WestStar Bank $194,567 14.2% $127,133 9.3% $144,314 10.5% $137,442 10.0%

Tier 1 Capital to Average

Assets:


WestStar Bank $184,373 11.3% $65,078 4.0% $65,078 4.0% $81,347 5.0%

Capitalized Under

Required

Minimum

Minimum

Minimum Required

to be Well

Prompt CorrectiveCurrent

Basel III

Required

Full

Actual Phase-In Phase-In Action Provisions

Basel III

W E S T S T A R B A N K H O L D I N G C O M P A N Y, I N C.

B O A R D O F D I R E C T O R S

L. Frederick Francis Carol M. Johnson

Chairman of the Board and Chief Executive Officer Director

Chairman and Chief Executive Officer, WestStar Bank Community Volunteer

Edward Escudero Meyer Marcus

Vice Chairman of the Board Director

President and Chief Executive Officer, High Desert

Capital, LLC

Chairman, MIMCO, Inc.

J. Robert Brown A. R. Miller, III

Director Director

President, Brownco Capital, LLC, and

Chairman and Chief Executive Officer, RB Toyota

General Partner/Manager, A.R.M. Farms, Ltd.

Richard A. Castro Jonathan W. Rogers, Jr.

Director Director

Owner and President, Castro Enterprises, Inc. President and Chief Executive Officer, St. Regis

Airport Properties

Miguel Fernandez S. Emma W. Schwartz

Director Director

Chief Executive Officer, Transtelco President, Medical Center of the Americas

Paul L. Foster William D. Skov

Director Advisory Director

President, Franklin Mountain Management, LLC, and

Chairman, Franklin Mountain Energy, LLC

Partner, Skov Farms

Woody L. Hunt Maria F. Teran

Advisory Director Director

Executive Chairman, Hunt Companies President and Chief Executive Officer, Sierra

Machinery, Inc.

WESTSTAR BANK

OFFICERS

L. Frederick Francis Claudia Rodriguez

Chairman and CEO Senior Vice President

David W. Osborn Socorro Rodriguez

President and COO Senior Vice President

Burt Blacksher Janice Schauer

Senior Executive Vice President and CLO Senior Vice President

Lisa Saenz Elizabeth Smith

Executive Vice President and CFO Senior Vice President

Yolanda Garcia Henry Tinajero

Executive Vice President and CCEO Senior Vice President

Liliana Miranda Rosa Butcher

Senior Vice President and CRO Vice President

Lee Rodriguez Monica Donas

Senior Vice President and CHRO Vice President

Jerry Harris Laura Fernandez

Senior Vice President and CCO Vice President

Orlando Hernandez Lianee Fernandez

Senior Vice President and CIO Vice President

Jack Chapman Patricia Fierro

General Counsel Vice President

Armando Avila Elizabeth Fowlkes

Senior Vice President Vice President

Magdalena Baca Isela Kirk


Arlene Carroll Jessica Margherio-Alvarez


Daniel Cueto Kevin Merhege


Yvonne Dorado Michael Morales


Roberto Guerra Mara Portillo


Patricia Martinez Jacqueline Salais


Isabel Medrano Adrian Santiago

WESTSTAR BANK

OFFICERS


Homer Renteria Patrick Sarabia


Richard Silva Omar Bernal

Vice President Assistant Vice President

Todd Smith Tina Crosby


Joanne Terrazas Jonathan Duran


Blanca Varela Melissa Garcia


Javier Varela Ruth Gifford


Veronica Watts Yvette Herrera


Courtney Yeatman Priscilla Monarez


Michelle York Xavier Parra


David Acuna Sandra Payan

Assistant Vice President Assistant Vice President

Carlos Amaya Rhea Tarin


LaNell Amparan Ruby Vigil


Annette Barela Cindy Willis


Roxanna Medina

Vice President

Joseph Sayklay Colleen Marusich

President Wealth Management Senior Vice President

William Brady Rosario Gonzalez


Tamara Gladkowski Vince Scarpinato


Wesley Wolff Ida Gallardo

President Insurance Vice President

Lenny Robles Rodolfo Telles

President Title Vice President

Gilberto Carreon Rachel Valles

Vice President Vice President

Travis Smith

Vice President

W E S T S T A R T R E A S U R Y M A N A G E M E N T D I V I S I O N

OFFICERS

OFFICERS

OFFICERS

OFFICERS

W E S T S T A R T I T L E

W E S T S T A R I N S U R A N C E

W E S T S T A R W E A L T H M A N A G E M E N T D I V I S I O N

100%

100%

FORM FR Y-6

WESTSTAR BANK HOLDING COMPANY, INC.EL PASO, TEXAS

FISCAL YEAR ENDING DECEMBER 31, 2018REPORT ITEM 2a: ORGANIZATIONAL CHART

WestStar Bank Holding Company, Inc.

LEI: NoneEl Paso, Texas

Incorporated in Texas

WestStar BankLEI: 5493007ZMQ2ZFZA66L83

El Paso, TexasIncorporated in Texas

WestStar InsuranceAgency, Inc.LEI: None

El Paso, TexasIncorporated in Texas

WestStar Title, LLC.LEI: None

El Paso, TexasOrganized in Texas

Non‐Managing Member

WestStar Tower Properties, LLC.

LEI: NoneEl Paso, Texas

Organized in Texas

Non‐Managing Member

Results: A list of branches for your holding company: WESTSTAR BANK HOLDING COMPANY, INC. (3122051) of EL PASO, TX.The data are as of 12/31/2018. Data reflects information that was received and processed through 01/06/2019.

Reconciliation and Verification Steps1. In the Data Action column of each branch row, enter one or more of the actions specified below

2. If required, enter the date in the Effective Date column

ActionsOK: If the branch information is correct, enter 'OK' in the Data Action column.

Change: If the branch information is incorrect or incomplete, revise the data, enter 'Change' in the Data Action column and the date when this information first became valid in the Effective Date column.

Close: If a branch listed was sold or closed, enter 'Close' in the Data Action column and the sale or closure date in the Effective Date column.

Delete: If a branch listed was never owned by this depository institution, enter 'Delete' in the Data Action column.

Add: If a reportable branch is missing, insert a row, add the branch data, and enter 'Add' in the Data Action column and the opening or acquisition date in the Effective Date column.

If printing this list, you may need to adjust your page setup in MS Excel. Try using landscape orientation, page scaling, and/or legal sized paper.

Submission ProcedureWhen you are finished, send a saved copy to your FRB contact. See the detailed instructions on this site for more information.

If you are e‐mailing this to your FRB contact, put your institution name, city and state in the subject line of the e‐mail.

Note:

To satisfy the FR Y‐10 reporting requirements, you must also submit FR Y‐10 Domestic Branch Schedules for each branch with a Data Action of Change, Close, Delete, or Add.The FR Y‐10 report may be submitted in a hardcopy format or via the FR Y‐10 Online application ‐ https://y10online.federalreserve.gov.

* FDIC UNINUM, Office Number, and ID_RSSD columns are for reference only. Verification of these values is not required.

Data Action Effective Date Branch Service Type Branch ID_RSSD* Popular Name Street Address City State Zip Code County Country FDIC UNINUM* Office Number* Head Office Head Office ID_RSSD* CommentsOK Full Service (Head Office) 1447639 WESTSTAR BANK 500 NORTH MESA STREET EL PASO TX 79901 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 4593649 LAS CRUCES BRANCH 555 SOUTH TELSHOR BLVD., SUITE 101A LAS CRUCES NM 88011 DONA ANA UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 1362086 CLINT BRANCH 105 SAN ELIZARIO CLINT TX 79836 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 2004507 EASTSIDE BRANCH 8340 GATEWAY BLVD. EAST EL PASO TX 79907 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 3637667 HONDO PASS BRANCH 4721 HONDO PASS DRIVE EL PASO TX 79904 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 4362023 PAISANO BRANCH 5604 EAST PAISANO DRIVE EL PASO TX 79925‐3334 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 3958250 REDD ROAD BRANCH 425 EAST REDD ROAD EL PASO TX 79912 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 3036550 VISCOUNT BRANCH 8865 VISCOUNT BLVD. EL PASO TX 79925 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 2494676 VISTA HILLS BRANCH 1790 NORTH LEE TREVINO DRIVE, SUITE 100 EL PASO TX 79936 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 1990395 WESTSIDE BRANCH 6700 NORTH MESA STREET EL PASO TX 79912 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 921851 YSLETA BRANCH 9343 ALAMEDA AVE EL PASO TX 79907 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 2798619 ZARAGOSA BRANCH 12101 MONTWOOD DRIVE EL PASO TX 79936 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 378651 FABENS BRANCH 1500 NORTH FABENS ROAD FABENS TX 79838 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

OK Full Service 3022834 HORIZON BRANCH 120 NORTH KENAZO HORIZON CITY TX 79928 EL PASO UNITED STATES Not Required Not Required WESTSTAR BANK 1447639

FORM FR Y-6


FISCAL YEAR ENDING DECEMBER 31, 2018REPORT ITEM 3: SECURITIES HOLDERS

CURRENT SHAREHOLDERS WITH OWNERSHIP, CONTROL OR HOLDINGS OF 5% OR MORE WITH POWERTO VOTE AS OF FISCAL YEAR ENDING 12/31/18:

(1)(a) (1)(b) (1)(c)NAME COUNTRY OF CITIZENSHIP NUMBER AND PERCENTAGE

CITY, STATE, COUNTRY OR INCORPORATION OF EACH CLASS OF VOTING SECURITIESRogers Family 238,201 shares or 12.33% Dede Rogers USA 82,259 shares or 4.26% El Paso, Texas, USA

Patricia Rogers USA 78,753 shares or 4.08% El Paso, Texas, USA

Jonathan W. Rogers, Jr. USA 31,000 shares or 1.60% El Paso, Texas, USA

Jonathan W. Rogers, III USA 15,058 shares or 0.78% El Paso, Texas, USA

Garland A. Rogers USA 15,000 shares or 0.78% El Paso, Texas, USA

Tony Lee Rogers USA 5,377 shares or 0.28% El Paso, Texas, USA

Jacques Henry Babel USA 5,377 shares or 0.28% El Paso, Texas, USA

Anne Elise Babel USA 5,377 shares or 0.28% El Paso, Texas, USA

MacGuire Family 226,842 shares or 11.74% Betty Lee Moor MacGuire (1) USA 150,000 shares or 7.77% El Paso, Texas, USA

Lee MacGuire Carnes USA 40,000 shares or 2.07% Austin, Texas, USA

Jennifer Leavell USA 35,000 shares or 1.81% Denver, Colorado, USA

Carol M. Johnson USA 1,842 shares or 0.10% El Paso, Texas, USA

FORM FR Y-6


FISCAL YEAR ENDING DECEMBER 31, 2018REPORT ITEM 3: SECURITIES HOLDERS

CURRENT SHAREHOLDERS WITH OWNERSHIP, CONTROL OR HOLDINGS OF 5% OR MORE WITH POWERTO VOTE AS OF FISCAL YEAR ENDING 12/31/18: (CONTINUED)


CITY, STATE, COUNTRY OR INCORPORATION OF EACH CLASS OF VOTING SECURITIESSkov Family 119,580 shares or 6.19% William D. Skov (2) USA 62,415 shares or 3.23% El Paso, Texas, USA

Robert E. Skov (3) USA 57,165 shares or 2.96% El Paso, Texas, USA

L. Frederick Francis USA 151,141 shares or 7.82%El Paso, Texas, USA

Paul L. Foster USA 101,713 shares or 5.27%El Paso, Texas, USA

J. Robert and Sherry W. Brown USA 100,240 shares or 5.19%Dallas, Texas, USA

SHAREHOLDERS NOT LISTED IN (3)(1)(A) THROUGH 3(1)(C) THAT HAD OWNERSHIP, CONTROL, ORHOLDINGS OF 5% OR MORE WITH POWER TO VOTE DURING THE FISCAL YEAR ENDING 12/31/18:


CITY, STATE, COUNTRY OR INCORPORATION OF EACH CLASS OF VOTING SECURITIES

N/A N/A N/A

1 Betty Lee Moor MacGuire is the trustee of 75,000 shares belonging to the Betty MacGuire Living Trust and 75,000 shares belonging to the John MacGuire Marital Deduction Trust.

2 William D. Skov is the trustee of 20,380 shares belonging to the William D. Skov Trust. In his name alone, he owns 42,035.

3 Robert E. Skov is the trustee of 18,891 shares belonging to the Robert E. Skov Trust. In his name alone, he owns 38,274.

(1) (2) (3)(a) (3)(b) (3)(c) (4)(a) (4)(b) (4)(c)PERCENTAGE OF LIST NAMES OF

NAME, PRINCIPAL OCCUPATION TITLE & POSITION TITLE & POSITION VOTING SHARES PERCENTAGE OTHER COMPANIES IFCITY, STATE, IF OTHER THAN WITH WITH HOLDING TITLE & POSITION WITH OTHER IN HOLDING OF VOTING SHARES 25% OR MORE VOTINGCOUNTRY HOLDING COMPANY COMPANY WITH SUBSIDIARIES BUSINESSES COMPANY IN SUBSIDIARIES SECURITIES ARE HELD

1 J. Robert Brown Rancher, Investor Director Director of WestStar Bank See information in 5.19% None See information in Dallas, Texas, USA confidential volume confidential volume

Richard Castro Business Executive Director Director of WestStar Bank See information in 0.29% None See information in El Paso, Texas, USA confidential volume confidential volume

2 Edward Escudero Business Executive Vice Chairman and Vice Chairman and See information in 0.23% None See information in El Paso, Texas, USA Director Director of WestStar Bank confidential volume confidential volume

Manager of WestStar TowerProperties, LLC

Miguel Fernandez Business Executive Director Director of WestStar Bank See information in 0.13% None See information in El Paso, Texas, USA confidential volume confidential volume

Paul L. Foster Real Estate Manager Director Director of WestStar Bank See information in 5.27% None See information in El Paso, Texas, USA confidential volume confidential volume

L. Frederick Francis N/A Chairman, CEO and Chairman, CEO and Director of See information in 7.82% None See information in El Paso, Texas, USA Director WestStar Bank confidential volume confidential volume

Chairman, CEO and Manager ofWestStar Tower Properties, LLC

Meyer D. Marcus Real Estate Investor Director Director of WestStar Bank See information in 0.03% None See information in El Paso, Texas, USA confidential volume confidential volume

A. R. Miller, III Farmer Director Director of WestStar Bank See information in 1.34% None See information in Fabens, Texas, USA confidential volume confidential volume

David W. Osborn N/A President President See information in 0.08% None See information in El Paso, Texas, USA and COO of WestStar Bank confidential volume confidential volume

President and Manager ofWestStar Tower Properties, LLC

Socorro E. Rodriguez N/A Assistant Secretary Senior Vice President, Treasurer See information in 0.00% None See information in El Paso, Texas, USA and Assistant Secretary of confidential volume confidential volume

WestStar Bank

Assistant Secretary of WestStarTower Properties, LLC

Lisa J. Saenz N/A Secretary and Treasurer Executive Vice President, CFO See information in 0.00% None See information in El Paso, Texas, USA and Secretary of WestStar Bank confidential volume confidential volume

Secretary and Treasurer of WestStar Tower Properties, LLC

3 Emma W. Schwartz Healthcare Development Director Director of WestStar Bank See information in 1.18% None See information in El Paso, Texas, USA Manager confidential volume confidential volume

Maria F. Teran Business Executive Director Director of WestStar Bank See information in 0.12% None See information in El Paso, Texas, USA confidential volume confidential volume

REPORT ITEM 4: INSIDERS

FORM FR Y-6WESTSTAR BANK HOLDING COMPANY, INC.

EL PASO, TEXASFISCAL YEAR ENDING DECEMBER 31, 2018

(1) (2) (3)(a) (3)(b) (3)(c) (4)(a) (4)(b) (4)(c)PERCENTAGE OF LIST NAMES OF

NAME, PRINCIPAL OCCUPATION TITLE & POSITION TITLE & POSITION VOTING SHARES PERCENTAGE OTHER COMPANIES IFCITY, STATE, IF OTHER THAN WITH WITH HOLDING TITLE & POSITION WITH OTHER IN HOLDING OF VOTING SHARES 25% OR MORE VOTINGCOUNTRY HOLDING COMPANY COMPANY WITH SUBSIDIARIES BUSINESSES COMPANY IN SUBSIDIARIES SECURITIES ARE HELD

REPORT ITEM 4: INSIDERS

FORM FR Y-6WESTSTAR BANK HOLDING COMPANY, INC.

EL PASO, TEXASFISCAL YEAR ENDING DECEMBER 31, 2018

Rogers Family (Principal Securities Holder) 12.33% Dede Rogers Retired Business Owner N/A N/A See information in 4.26% None See information in EL Paso, Texas, USA confidential volume confidential volume

Patricia Rogers Business Executive N/A N/A See information in 4.08% None See information in EL Paso, Texas, USA confidential volume confidential volume

Jonathan W. Rogers, Jr. Real Estate Investor Director Director of WestStar Bank See information in 1.60% None See information in EL Paso, Texas, USA confidential volume confidential volume

Jonathan W. Rogers, III Entrepreneur N/A N/A See information in 0.78% None See information in EL Paso, Texas, USA confidential volume confidential volume

Garland Rogers Student N/A N/A See information in 0.78% None See information in EL Paso, Texas, USA confidential volume confidential volume

Tony Lee Rogers Student N/A N/A See information in 0.28% None See information in EL Paso, Texas, USA confidential volume confidential volume

Jacques Henry Babel Student N/A N/A See information in 0.28% None See information in EL Paso, Texas, USA confidential volume confidential volume

Anne Elise Babel Student N/A N/A See information in 0.28% None See information in EL Paso, Texas, USA confidential volume confidential volume

MacGuire Family (Principal Securities Holder) 11.74%4 Betty Lee Moor MacGuire Retired Community N/A N/A See information in 7.77% None See information in

EL Paso, Texas, USA Volunteer confidential volume confidential volume

Lee MacGuire Carnes Teacher N/A N/A See information in 2.07% None See information in Austin, Texas, USA confidential volume confidential volume

Jennifer Leavell Ranch Manager N/A N/A See information in 1.81% None See information in Denver, Colorado, USA confidential volume confidential volume

Carol M. Johnson Retired Business Owner Director Director of WestStar Bank See information in 0.10% None See information in El Paso, Texas, USA confidential volume confidential volume

1 Shares owned jointly by J. Robert Brown and Sherry W. Brown.2 Shares owned jointly by Edward Escudero and Margarita Escudero.3 Emma W. Schwartz is the beneficial owner of 609 shares, or 0.03% belonging to Emma W. Schwartz and 22,153 shares, or 1.15% belonging to her husband Douglas A. Schwartz.4 Betty Lee Moor MacGuire is the trustee of 75,000 shares belonging to the Betty MacGuire Living Trust and 75,000 shares belonging to the John MacGuire Marital Deduction Trust.

weststar bank holding co inc - dallasfed.org...dec 31, 2018 · title: weststar bank holding co inc...

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